What's happening with costs and what to do about them: workers compensation coverage has gotten more difficult to obtain, and costlier, in the past couple of years. Companies need to focus on the source of costs and on financing structures.

• Author: Conger, Bob
• Position: Workers compensation

You don't typically expect to see newspaper headlines about workers compensation, an insurance product designed to help employers fulfill their legal obligations to provide medical care and income for employees injured at work.

Lately, though, workers compensation has received considerable media attention, particularly in California--where it was part of the gubernatorial debate--and Florida. The situation in California is fairly chaotic. Average rates for many employers increased over 50 percent in the last two years, a number of insurers restricted their operations or closed down and the state workers compensation fund grew meteorically.

There is also great uncertainty about the potential effects of recent and upcoming legislation. The Florida headlines are more upbeat, since recent legislative changes resulted in a 14 percent rate rollback. The dynamics around this coverage, which ultimately are manifested in employers' costs, are not unique to these two states; a number of emerging issues across the U.S. have increased employers' focus on this seemingly routine coverage. And, in every state, employers can take some basic steps to control costs.

To gain some perspective on where we are, it's helpful to review how we got here.

* During the 1980s, employers experienced significant increases in their workers compensation costs, due in part to significant benefit expansions legislated in the late '70s and early '80s. In response to these trends, employers more actively managed their workers compensation claims and/or started to self-insure, rather than buying first-dollar coverage.

* During the 1990s, employers reaped the benefits of cost management programs implemented in the "80s. Consistent annual reductions in claim frequency and the impact of a strong economy further contributed to favorable cost trends. Insurance company results were boosted by investment opportunities, and many insurers lowered prices to attract or retain customers. In some states, most notably California, vigorous price competition induced a significant migration of employers from self-insurance back to traditional fixed-cost insurance.

* By early 2001, the workers compensation market started to "harden"--prices were increasing, and fewer insurers would quote a risk--in some jurisdictions, and the events of Sept. 11, 2001, exacerbated this trend. The workers compensation market remains hard to date.

Factors contributing to this hard market include:

* Downward trends...